Appeal from an order of the United States District Court for the Southern District of New York, Charles M. Metzner, Judge, (1) disallowing as costs of an appeal a portion of the expenses necessarily incurred in staying execution of a judgment pending appeal, where because of the size of the judgment a supersedeas bond was impracticable and other provisions were made to secure the judgment, and (2) allowing as a setoff against the costs incurred by the defendant-appellants expenses in preparation for a deposition that had not taken place. Reversed in part, affirmed in part.
Moore, Oakes and Timbers, Circuit Judges. Timbers, Circuit Judge (dissenting).
On April 14, 1970, Trans World Airlines, Inc. (TWA), was awarded by the United States District Court for the Southern District of New York, Charles M. Metzner, Judge, a default judgment in the amount of $145,448,141.07 in a private antitrust action brought by TWA against Hughes Tool Co. (Toolco).*fn1 The judgment was subsequently affirmed by this court, Trans World Airlines, Inc. v. Hughes, 449 F.2d 51 (2d Cir. 1971), but reversed by the Supreme Court. Hughes Tool Co. v. Trans World Airlines, Inc., 409 U.S. 363, 34 L. Ed. 2d 577, 93 S. Ct. 647 (1973). This appeal, by defendant-appellants Howard Hughes, Toolco and Raymond M. Holliday, is from an order disallowing costs in connection with the successful appeal to the Supreme Court. Since the original judgment was one of the largest ever granted by a United States court, it is not altogether surprising that the costs involved in connection with the prosecution of the appeal are themselves more substantial than run of the mill judgments even in the Second Circuit. The principles pertaining to cost recovery, however, must remain the same.
The costs disallowed by the district court were a portion of the expenses incurred by Toolco in obtaining a stay of execution pending appeal. Because of the unprecedented size of the judgment, the obtaining of a supersedeas bond was impracticable. For this reason Judge Metzner granted a stay of the execution of the judgment pending appeal on condition that Toolco (1) post security by way of a letter of credit in favor of TWA in the amount of $75 million and (2) secure the $83 million plus balance of the judgment, by maintaining its net worth at more than three times the amount of that balance. Toolco was further required to furnish TWA with quarterly statements audited by its independent public accountants to evidence their net worth.
After the successful appeal to the Supreme Court, the district court judge allowed to the Hughes appellants a charge equal to $1,015,625 which was the amount of the fee (one half of one per cent per annum interest) paid on the $75 million letter of credit issued by the Bank of America in lieu of a supersedeas bond. The court disallowed, however, $617,765 in charges for the quarterly audits which were made in connection with furnishing certifications concerning the maintenance of Toolco's net worth at the special level. In addition, the court disallowed $66,040.40 expended by Toolco in connection with providing security to the Bank of America as required under the terms of the letter of credit.
Also involved in this appeal is the allowance of a setoff of $4,602.55 in expenses incurred in the district court by TWA preparatory to the taking of a deposition of Hughes which was never taken because he failed to appear. We affirm the judgment below in part and reverse it in part.
However costs on appeal have been treated in the past, see, e.g., Broffe v. Horton, 173 F.2d 565, 566 (2d Cir. 1949); Land Oberoesterreich v. Gude, 93 F.2d 292, 293 (2d Cir.), cert. denied, 300 U.S. 663, 81 L. Ed. 871, 57 S. Ct. 493 (1937); Williams v. Sawyer Bros., Inc., 51 F.2d 1004, 1006 (2d Cir. 1931), they are now governed by Fed. R. App. P. 39(a) and (e). Under Rule 39(a), "Except as otherwise provided by law . . . if a judgment is reversed, costs shall be taxed against the appellee unless otherwise ordered . . .." Under Rule 39(e), "the premiums paid for cost of supersedeas bonds or other bonds to preserve rights pending appeal . . . shall be taxed in the district court as costs of the appeal in favor of the party entitled to costs under this rule."*fn2 The district court disallowed the quarterly audit charges, saying,
These audits were accepted by the court at the request of the defendant as a less drastic but more costly form of protection of the judgment covered by the plaintiff. It is perfectly clear from the proceedings in the spring of 1970 that Toolco was most interested in conducting business as usual. 314 F. Supp. 94 (S.D.N.Y. 1970). Since the defendant needed and was using millions of dollars to buy a hotel and an airline, and making alterations to hotels at the time it was called on to bond the judgment, it should bear the costs of allowing business to go on as usual.
It is necessary, even if not conclusive of the result, to see just how the charges for the audit came about. Adoption of the Federal Rules of Appellate Procedure, effective July 1, 1968, resulted in the repeal of Fed. R. Civ. P. 73(d) which had provided that the district court should fix a supersedeas bond in "the whole amount of the judgment remaining unsatisfied . . . unless the court after notice and hearing and for good cause shown fixes a different amount . . .." That language permitted the district court in a case of hardship to issue a stay of execution, but after the repeal of Rule 73(d) the only requirements relating to supersedeas bonds were Fed. R. Civ. P. 62(d) and Local Rule 33 of the Rules of the District Court for the Southern District of New York, neither of which contained the express language of former Fed. R. Civ. P. 73(d) allowing discretion to the district judge in fixing bond provisions for appeal.*fn3 Nevertheless, exercising discretion, District Judge Metzner quite properly held that he had the power to provide for a form and amount of security different from the supersedeas bond. See 9 J. Moore, Federal Practice Para. 208.06 at 1416 (2d ed. 1969).
The district court's decision in this matter came only after a number of hearings at which TWA and Toolco expressed their diametrically opposed positions with respect to the need for a bond to protect the judgment during appeal. The Hughes appellants argued that since Toolco (100% owned by Hughes) had over $500 million in net worth, there was no need to post any bond. Instead, Toolco offered to create a lien on specific property having a value in excess of $45 million, the amount of the compensatory portion of the judgment. TWA countered by demanding either full payment of the judgment or the posting of a bond in the amount of $161 million as required by Local Rule 33, n.3 supra.
After the court indicated an unwillingness to accept either of these extreme positions, Toolco made the further offer to provide TWA throughout the pendency of the appeal with financial reports evidencing that Toolco's net worth remained in excess of three times the amount of the judgment. The court made its ultimate decision after considering that during the court of negotiations relative to the supersedeas bond Toolco acquired The Dunes Hotel in Las Vegas, Nevada, for a cash consideration of $35 million and was engaged in another transaction in which it would be required to expend another $11 million. In ruling on the bond for appeal, the district court said, "Part of business as usual must include some recognition of the rights of this plaintiff that has acquired a judgment against Toolco for violation of the antitrust laws of the United States . . .. It must be prepared to assume some financial burden to achieve 'business as usual.'" At the same time, however, the court stated that it "fully appreciate[d] that under present conditions a supersedeas bond in the amount contemplated by Rule 33 is not practicable under the circumstances."
The court then went on to order Toolco to post security in the form required by General Rule 31(b)*fn4 in the amount of $75 million. Judge Metzner ordered that the balance of $86,447,686.59 "shall be secured along the lines suggested by the defendants as to the maintenance of Toolco's net worth at three times the amount of such balance" and directed the parties to come up with the details of that arrangement. After the usual sparring the embattled parties did so. As previously stated, a letter of credit was obtained, with agreement by the parties, as an acceptable substitute for the $75 million bond which would otherwise have been required. The parties agreed that the net worth which Toolco would maintain would be $335 million and that within 120 days of the end of each calendar quarter there would be presented audited and certified balance sheets to that effect, together with certificates by the treasurer of Toolco as to the maintenance of that net worth. The Hughes appellants also agreed not to distribute or transfer assets to reduce the net worth to less than the $335 million amount. This was incorporated in a consent order executed by the parties and approved by the court.
In our view the costs of the audits under the consent order were costs in lieu of providing a supersedeas bond as provided by the rules.*fn5 Just as the court allowed the one-half of one per cent premium on the letter of credit, so too it should have allowed the costs for the audits. To be sure, this was a price of doing business as usual, but that is true in the case of any supersedeas bond on appeal. We fail to see how the court's wise exercise of its discretion in an unusual case not to require security by way of a bond may be used to justify the disallowance of the costs of procuring alternate security for the appeal. When a judgment is reversed, as this one was, the costs of obtaining a supersedeas bond have long been held to be a proper item of costs. Berner v. British Commonwealth Pacific Airlines, Ltd., 362 F.2d 799 (2d Cir. 1966); Land Oberoesterreich v. Gude, supra. If a defendant has to liquidate all or a substantial part of his business in order to exercise the right to appeal, then the appeal may surely be of doubtful value. The purpose of the stay was to permit Toolco to conduct business as usual, and so long as TWA was adequately secured Toolco was entitled to do so; in that sense, the cost of any supersedeas bond is always a cost incurred to permit business as usual. We do not see how any distinction can be made between the interest payable for the letter of credit on the one hand and the quarterly audits on the other, since they both went to providing adequate security to TWA. While, to be sure, costs are allowable in the exercise of the district court's discretion,*fn6 that discretion must not be exercised arbitrarily; "Discretion without a criterion for its exercise is authorization of arbitrariness." Brown v. Allen, 344 U.S. 443, 496, 97 L. Ed. 469, 73 S. Ct. 397 (1953). The district court sets forth no criterion for the disallowance of this item of costs. ...